According to the British Bankers’ Association and the French Banking Federation, requiring too-big-to-fail megabanks in Europe to separate their trading activities would be a “handicap in financing European companies”. The empirical evidence suggests the opposite: well capitalised, separated commercial banks would be less risky (other things being equal) and so would benefit from cheaper funding than existing megabanks. They would not have to share the benefits of implicit government support with their trading colleagues. Separation should therefore lower the cost of lending by big banks, not handicap it (incidentally, we would not describe as “big lenders” banks that lend only a small fraction of their balance sheets. The real big lenders are the many smaller universal and other banks that provide most of Europe’s SME financing and are outside the scope of the proposal).
The bank lobbyists then warn that separation would harm market liquidity and that this would be bad for the economy. We support the need for liquidity provision in illiquid markets. We are also convinced that large banks’ trading operations should bear their true cost of capital, the same as any other business in a market economy. Better pricing would improve resource allocation, reduce unnecessary trading and lower the taxpayer burden in future financial crises. These are significant benefits for the economy.
Bank lobbyists also claim that separation would be contrary to the EU’s ambition for a capital markets union. Again, the opposite is the case. Reducing public support for a few dominant megabanks would allow smaller participants to enter the sector and thrive. Capital market end-users would then benefit from greater diversity, market discipline and competition.
In the UK, the public benefits of ringfencing are widely accepted outside the bank lobby. A comparable reform in Europe would ensure a level playing field and help to lift Europe’s struggling economy. All that is needed is for EU policy makers to resist special pleading designed to protect subsidies and national champions; we hope they succeed.
Acting Secretary General, Finance Watch,